Gov’t handouts exceed taxes as percentage of average household income for first time since 1936

Ed MorrisseyPosted at 10:12 am on April 18, 2011

In 2008, American households crossed a line that had last been seen in the Great Depression. For the first time in 72 years, the percentage of average household income supplied by the government exceeded that of the taxes paid to the government. Despite the talk of recovery, the trend has actually accelerated ever since, according to James Cooper at The Fiscal Times:

For the first time since the Great Depression, households are receiving more income from the government than they are paying the government in taxes. The combination ofmore cash from various programs, called transfer payments, and lower taxes has been a double-barreled boost to consumers’ buying power, while also blowing a hole in thedeficit. The 1930s offer a cautionary tale: The only other time government income support exceeded taxes paid was from 1931 to 1936. That trend reversed in 1936, after a recovery was underway, and the economy fell back into a second leg of recession during 1937 and 1938.

As then, the pattern now reflects two factors: the severe depth of the 2007-09 recession and the massive fiscal policy response to it. The recession cut deeply into tax payments as more people lost their jobs, and it boosted payments for so-called automatic stabilizers, such as unemployment insurance, that ramp up payments as the economy turns down. Plus, policy actions, including the Recovery Act, boosted payments to households by expanding and extending jobless benefits and creating other income subsidies while extending the Bush-era tax cuts and adding new reductions in income and payroll taxes.

Government transfers of income to households started to overtake personal taxes at the start of 2008, and the gap has been widening. In February, households received more than $2.3 trillion in income support from unemployment benefits, Social Security, disability insurance, Medicare, Medicaid, veterans’ benefits, education assistance and other cash transfers of government funds to individuals. In the same month, households paid $2.2 trillion in income, payroll, and other taxes. The difference was about $150 billion, equivalent to more than 1 percentage point of overall personal income and about four times the amount Republicans and Democrats agreed to cut from government spending through Sept. 30.

This chart is instructive:

We should note a couple of points from these trend lines. First, the amount of government support to households has steadily increased over the past 70 years. Up to 1965, that level was around 6%. Within a decade, it doubled to 12% and then increased on a much gentler slope through the 1980s, 1990s, and through the Bush years. Clinton-era welfare reform actually reduced it, but only slightly, and only temporarily — and it started trending slightly upward through the Bush 43 administration. Remember that when people paint the Bush era as some sort of heartless turn from safety-net spending.

On the other hand, look at the tax receipts. We often hear that taxes are at some sort of historic low, but that’s absurd on its face. Prior to the crash, taxes took up 20% of household income, about the same level as during the previous 25 years, with the exception of a bubble during the Clinton years. That level is almost twice what taxes took out of household income during World War II, for instance, and even with the tumble over the last three years, it’s still well above what the government took prior to Medicare’s passage during LBJ’s Great Society.

The clear problem in this chart isn’t that the red line has moved downward into historically low territory; it’s that the blue line has kept moving up into historically high territory. The long-term solution isn’t to raise taxes, but to wean the American public off of its historic dependence on welfare and social spending.

Update: 1965, not 1065. That Battle of Hastings sure was a bummer, wasn’t it?

Update II: Reader Jeff D notes that The Fiscal Times report says that the gov’t received $2.2 trillion while paying out $2.3 trillion and that’s simply not possible, and he’s right; those are obviously numbers for a full year. I presume that the reporter confused the reporting date for the analysis with monthly accounting, but I’ll drop a note to the FT for a clarification.